So you’ve decided to take the plunge in buying a business. Congratulations. I salute such bravery. Owning a business represents one of America’s great fundamentals — our free-enterprise system.
You’ll have multiple financing options.
Firstly, though, make sure you enjoy the swim — that entrepreneurship is in your DNA. Owning a business is rewarding and fun like going for a swim, but it’s very likely the toughest ordeal you’ll ever endure — much like having to tread water for several hours.
So assess your aptitude for entrepreneurship.
Strong personal brand. Make sure you have a strong personal brand. People will be more receptive to investing or loaning you money (see 8 Tips to Boost Your Career with Shameless Self-Promotion).
That includes being adept at selling (see The Seven Steps to Higher Sales).
If you’re really strong, financiers might approach you first when you least expect it. That’s the ideal situation.
A quick case study: A banker approached me after my broadcasting career during my first consulting gig, which was successful.
The banker, a member of the client’s board of directors, liked the project’s results and invited me to lunch to get my opinions about lending money to a new radio-station owner.
Over dessert, the banker said: “Thank you. Any time you want to buy a station, see me.” (One of my sweetest desserts ever.)
Implementing the process. Even if you’re apprehensive but you believe you have what it takes, start working on your financing. That includes making sure your credit is in great shape. (If you have issues, you might want to review: If Your Credit Report Has Errors, You Have Options).
Next, get pre-qualified.
It’s a delicate balance — shopping for a business and approaching financiers. Sellers want to know you’re capable of buying and banks prefer you have in mind a business to buy.
Again, the whole process is much easier if you have a strong personal brand. I can’t over-emphasize it.
Getting pre-qualified for a bank loan. As in buying a home, business sellers frequently get more enthusiastic if you get a pre-qualification letter. The bank will want information on your prospective business, your collateral, and your plan to repay the loan.
Even if you’re 100 percent confident in a banking relationship, you risk losing a loan opportunity if the bank abruptly changes its lending requirements. So approach multiple banks.
You can try asking for more than you need to buy a business for working capital, but it’s unlikely the bank will go along with the idea. I don’t like it because it’s an indicator of being under-financed.
Prepare a contingency plan. It’s possible you’ll have cash flow issues in this tepid economy.
Whatever type of loan you seek, you’ll need collateral. It should be as much as 70 percent of the purchase amount. A bank will likely consider equity in your home or giving you a second mortgage. But the bank will prefer liquid assets.
When you identify prospective companies to purchase, be absolutely certain you know what you’re getting (see the 7 Basic Questions to Ask Before Buying a Business).
Owning a business is rewarding and fun like going for a swim, but it’s very likely the toughest ordeal you’ll ever endure — much like having to tread water for several hours.
Here are financing options:
1. Debt financing. This often means borrowing money from a bank, but it’s hard to do. Many banks are reluctant to loan money.
That’s why the SBA-loan process is easier.
For an SBA loan, you’ll need the following:
– Explain why you want to buy a business
– How you’ll grow it
– A business plan with three years of projections
– Good personal credit
– A down payment equaling 15 to 20 percent of the purchase price
You can also get loans from family or friends.
2. Equity financing. Instead of borrowing money, you can sell shares. You can pitch venture capitalists, investors, or angel investors (see How to Attract an Angel Investor).
While you don’t have to repay the money with interest, you face the prospect of giving up control or partial ownership.
Downturn or not, investment capital is indeed available (see What No One Tells You about Raising Investment Capital).
Despite its democratic approach, crowdfunding – a vehicle to help entrepreneurs raise money – is remarkably similar to venture capital funding.
3. Seller financing. You’ll need a seller who is willing to wait for the pay-off. This is my personal favorite, and it’s what I once did to save cash flow. The ideal scenario is to save your cash.
The seller was so anxious to sell so he could change careers, he approached me twice before I agreed. This enabled me to get a favorable agreement — to pay 10 percent of the net monthly profit over a two-year period — without even having to make a down payment.
Admittedly, mine was an unusual case. Typically, the seller will finance you over a three to five-year period. Unless you encounter a motivated seller, the seller will try to inflate the price. (That’s another reason to be proficient in sales.)
The upside is the seller will want you to be successful, and will likely be available to give you ongoing tutoring. Plus, the payment plan will be more flexible. So, you’ll likely have a better cash-flow opportunity than borrowing from a bank or getting investors.
4. Roll over your 401(k) plan. Perhaps you’ve been successful in the stock market in planning for a retirement.
Good luck! Enjoy your swim.
From the Coach’s Corner, note: Don’t tap your credit cards for cash to buy or to operate a business. You’ll probably find the financing process is easier after you buy a company and develop a track record of making money. Then, banks are more eager to give you a line of credit.
Also, you’ll often save money by leasing equipment, which helps your cash flow. I discourage clients from tapping capital via factoring companies that want to lend you money based on your accounts receivables.
From the Coach’s Corner, related information:
Best Practices for New Women Entrepreneurs to Stay Focused — The keys for business women are to plan well, create the right balance, persevere and have the right support system. It isn’t commonly known, but women entrepreneurs inherently have stronger skills than men in key areas.
11 Tips to Safely Walk the Entrepreneurial Tightrope — For successful small firms, strong cash flow doesn’t just happen. Advertising firms to tech startups have a system. They plan and implement with precision. You, too, will stay afloat by being proactive using these strategies.
Checklist – 10 Legal Basics for New Entrepreneurs — Thinking about legal matters can be tedious when you have a lot of details on your plate. But laws and regulations are important when establishing and operating your company.
10 Tips for Hiring the Right Attorney for Your Business — In running a successful business, you typically need the services of three professionals — a good tax accountant or CPA, insurance agent and an attorney. Know that talent and skill levels are crucial for your success.
“A bank is a place that will lend you money if you can prove that you don’t need it.”